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Types of Home Loans

December 6, 2016

Possibly the most important factor potential homeowners need to consider during the home-buying process is how to pay for it. Buying a home is typically the largest purchase individuals make in their lifetime, and most people cannot afford to purchase it outright. This is where mortgages come in — but with all the different types of home loans, which one is right for you? Making the right choice can save you money, so understanding the elements of various financing programs is crucial to making the right decision for your situation. Here are two questions to ask during the home loan selection process:

Fixed-Rate Loan or Adjustable-Rate Mortgage (ARM)?

The first question borrowers need to ask is whether a fixed-rate or an ARM loan is right for them. Fixed-rate loans are the most common and offer more security in terms of predictable monthly payments. This type of mortgage is billed over a set amount of time (10, 15, 20, or 30 years) and the interest rate stays the same throughout the loan term, regardless of market fluctuation. Just as with fixed-rate student loans, you will know exactly how much you will need to pay each month. This type of loan is best for homeowners who are more risk-averse and plan to stay in the same place for a substantial amount of time.

The other option is adjustable-rate mortgages. These loans usually offer a lower starting interest rate than comparable fixed-rate loans, but the interest rates (and, in turn, payments) will fluctuate up or down at specified intervals based on current rates. ARMs come with more risk, especially in a rising interest rate environment, but the lower starting rates may offer money-saving potential provided that interest rates do not rise dramatically after the adjustment period. This loan is ideal for potential homeowners who have enough flexibility in their budgets to withstand potential payment increases or those who plan to move or refinance before the adjustment period resets.

Conventional or Government-backed loan?

Borrowers will also need to consider whether they want (or qualify for) a government-backed loan, as opposed to a conventional loan. Any loan that is not affiliated with the government is referred to as a conventional loan. Here are some of the options the government offers for financing a home:

    • Federal Housing Administration (FHA) Loan: This type of loan is great for homeowners who do not have the funds available to make a traditional down payment of 20 percent, as an FHA loan allows down payments as little as 3.5 percent of the amount of the loan. However, these loans come with several conditions, such as caps of $417,000, fixed rates, and a mortgage insurance requirement.
    • Veterans Administration (VA) Loan: This loan is available to qualifying veterans and offers tremendous benefits, including no money down and no mortgage insurance requirements.
  • United States Department of Agriculture (USDA) Loan: USDA loans are designed to help lower-income individuals in rural areas purchase a home. If you qualify, you could purchase a home with zero down payment and discounted interest rates.

Which is Right for You?

Mortgage loans are not one-size-fits-all — each prospective homeowner has a different situation with varying circumstances. For additional assistance in determining which mortgage loan program provides the ideal solution for your goals, consider consulting a reputable real estate agent or mortgage broker with experience in working with a variety of clients. Numerous programs exist to help individuals achieve the dream of homeownership, and understanding the pros and cons of each, as well as your preferences and financial situation, can help you choose a loan that best fits your needs.

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Working Professional with Less Debt
2018-10-17
Entrepreneurs – The Cost of Starting Out

Starting a business can seem overwhelming, but it takes the right kind of person. For many entrepreneurs, money can be their biggest concern. You’ve got the dream, but you don’t have the dollars. People will often look for assistance using commercial loans to gain the money needed to get started, but what if you already owed thousands of dollars? Let’s take a look at the cost of starting a business with student loans. In this example, we’ll use a pizza place.  

Research and Planning

Before you begin investing your time and energy into a business, understand if and where there is a need for it. Where is there a lack of pizza places? Once you’ve determined a good area where there will be demand for the product look at your competitors. Look specifically at, prices, marketing, branding, and style. Now take a look at the median income for the neighborhood and surrounding towns that your pizza place would be located in. Is it a lower-income neighborhood or a higher-income neighborhood? Understand the area and price your product accordingly. Now that you have a better understanding of what you’ll need to start your pizza place create a business plan. If you’re in need of additional funding for your business this business plan will be of the utmost importance. There are different formats available for business plans, some more traditional while others are fairly brief. Be sure to check online for samples.  

The Cost of Business

Know what your expenses will be. Identify what those expenses are. The SBA has a list of expenses for starting businesses. These expenses include office space, equipment, supplies, utilities, licenses, permits, inventory, lawyer, salaries, marketing costs, and website costs. Once you have a list of your expenses, estimate out how much you’ll need to spend on each. Check out this handy worksheet that illustrates the starting costs for a pizza place. The SBA expense calculator provides an estimation of $18,975 as the starting costs for a business. The estimation includes one-time expenses like equipment, security deposits, and legal fees and monthly expenses like rent, insurance, and advertising. Every business is different, but typically there is some type of investment that must be made upfront. Now don’t forget that if you’re looking to start a business you can use some “startup costs’ as tax deductions. Tax deductions* per the SBA site include costs to get your business operation ready and costs of investigating the creation of a business. Once you have an idea of your expenses and what is tax deductible, you’re onto step two.  

FUN-ds

Here is the “fun” part where many young entrepreneurs get caught up - getting the funds. Not only do younger entrepreneurs not have the dollars but, they owe thousands in debt. That thousand dollar debt is likely due to student loans. According to a recent survey, nearly half of Americans considering starting a business said that student loans were a major barrier to entrepreneurship. Refinancing student loans can help. When refinancing you may get a lower rate or change the terms of the loan. It can help lower your monthly payments, sometimes significantly, giving you more cash in your pocket. Once your personal finances are in order (decreased student loan debt) figure out how much capital you can put towards your business. For this particular step, we’d recommend working with a financial advisor. By self-funding your business you will take on all the risk of the business, not to mention taking funds from all your accounts resulting in penalties. Instead of self-funding the capital fully, try crowdsourcing, small business loans which you’ll want to research heavily to assure you’re receiving the best rate or finding investors willing to provide capital. If you take money from an investor for your pizza place, it’s a venture capital investment. This type of investment is usually offered in return for a share in the company and some sort of power position within the company. Therefore, if you do take on venture capital investments understand that the business is no longer just yours.  

Naming

Once you’ve gained the funds you’re well on your way! Next, you’ll set up the internal structure for your business, register the name for your pizza place, set up your Tax IDS, and get the appropriate licenses. Licenses are usually industry, location, and state-specific so be sure you’re working with a legal team to meet all appropriate criteria or it could end up costing you. All decisions will have an impact on how your company functions, so be sure that you’re taking every necessary precaution and good luck in your journey. Refinancing may not be the solution to all of your money problems, but it’s a step in the right direction. When you’re starting out, all it takes is to get going on the right path to continue moving forward. Don’t forget to open up a business bank account to help organize your business funds from your personal funds. Similarly to refinancing you’ll want to choose a bank with transparency, credibility, and great service.  

Facts About Student Loans That Will Save You Money

*Please note Education Loan Finance is not a registered tax professional.
Guy Investigating FDIC Backed Banks
2018-10-12
FDIC-Backed and Why You Should Care

You know the orange Chance cards you used to draw when you played Monopoly? Remember the one where the little guy was so broke he was wearing his pockets on the outside of his pants? Well, imagine that guy is your bank, and through bad luck or bad decisions, they negatively affect your life. You go to get a loan, and they aggressively try to get you to borrow more than you can afford. Or, when you show up to get your money, they just shrug, and you’re out of luck. Things are different today and the protections for account holders and borrowers for certain banks are better than ever, but how did we get here? What exactly does FDIC insured mean?

Banking used to be very risky.

Believe it or not, that’s pretty much how things were for a long time in the United States, and it happened quite a bit. Lending practices were not necessarily based on sound data and information. More than a third of the banks in the1920s closed their doors, and deposit holders had little recourse. That’s why many people of that generation had a deep distrust of banks and why you may have heard stories of people stashing money in their mattress or burying it in a jar in the backyard to keep it safe.

The creation of the FDIC.

You’ll notice that most people aren’t hiding money in their bed these days, and no one is wearing their pockets on the outside of their pants anymore. Sure maybe no one ever really wore their pants that way, but it could also be because Congress passed the banking act of 1933 and created the FDIC. FDIC stands for Federal Deposit Insurance Corporation, but we usually just say FDIC because the government loves acronyms. The FDIC is quite literally an insurance company and just like other insurance companies, they
provide protection from an unforeseen event, in this case, a bank failure. They also function as a regulatory agency to make sure banks are following laws and guidelines.

What happens when an FDIC insured bank fails?

When a bank becomes insolvent, the FDIC essentially takes over the bank. Almost no matter what, the bank will still have some deposits and assets. The FDIC will try to sell the bank’s deposits and loans to another member bank. In this case, you the customer will find their deposits at a new bank. If for some reason the FDIC cannot successfully sell the bank, they will issue a check to the depositor directly.

It’s not the 1920s anymore, why should I care?

Sure, the Roaring 20s and all its banking peril are long in the past, but you might be old enough to remember the Savings and Loan scandal of the 1980s or the financial collapse of 2008. These were both significant events that wreaked havoc on the banking industry. Banks can still have problems and sometimes big problems. In fact, from 2008 to 2012, 465 banks completely failed. While most everyone felt the effects of the financial collapse in some way, bank depositors were spared significant loss thanks to the FDIC. This is why you absolutely want to make sure your bank is a member of the FDIC.

What else does the FDIC do?

Member banks are subject to strict overview of the FDIC. They monitor debts and assets and help to ensure banks have enough cash on hand for safe and responsible operation. They aren’t just guaranteeing your money, they are actively working to make sure the bank is healthy. Additionally, they work to make sure banks are compliant with the latest consumer and banking regulations.

Are there protections for borrowers as well?

Yes. The FDIC isn’t only focused on depositors, they protect borrowers as well. So if you are in the market for a home loan or you are looking to refinance those student loans, it’s important to pay attention to which lenders are FDIC members. Member lenders are under scrutiny to make sure the debt to income ratios for borrowers aren’t outside what borrowers can afford to realistically pay. You want to work with a member bank to ensure an upfront and transparent process.

Are all financial institutions FDIC insured?

No, not all financial institutions are FDIC members. The FDIC examines and supervises approximately 4,000 banking institutions in the United States.  

Tips for Finding the Perfect Lender

  Sources: https://en.wikipedia.org/wiki/Federal_Deposit_Insurance_Corporation https://en.wikipedia.org/wiki/List_of_bank_failures_in_the_United_States_(2008-present) https://www.youtube.com/watch?v=dBOFiDpmESI
Millennials Renting Instead of Buying
2018-10-10
Top 5 Barriers to Homeownership for Millennials

Most millennials rent their living spaces and don’t purchase them. Ever wonder why that has become such a common stereotype of the millennial generation? Well according to some research done by Urban Institute it isn’t just a stereotype. It dives deep into this issue to explain the main barriers to homeownership for millennials and how to address them. Here are five of those barriers:

Location-

Millennials are moving to the biggest cities in the country in larger numbers than any generation before. In these cities (like New York, Chicago, and San Francisco), housing prices are extremely high and the actual housing supply for purchasing is low. You can save money in a major city by using mass transit instead of driving or taking cabs.

Starting a family-

In the past, getting married and having children were the life steps that often led to home ownership. Now, we’re getting married and starting families later in life (or not at all), causing a delay in the need to buy a home. If you are wanting to buy a house, don’t let your marital or family status stand in your way. You can save for a down payment now to speed up the process.

Student debt-

The total amount of student loan debt in the United States is at a historical high, and more students are taking out loans than ever before. Many people who are trying to pay off their student loans feel as if they cannot save for a down payment and do not want to add a mortgage on top of their existing debt. Also, a high debt-to-income ratio can make it more difficult to obtain a mortgage. Refinancing your student loan can help you reduce your rate, allowing you to pay off your principal faster and lower that ratio.

Renting-

Typically before taking the step to owning a home, you will rent a place for a few years. Rental rates have continuously risen for years, which is not allowing people to save as much money for their future down payment. This delays reaching that next step by at least a couple of years. You do not have to let this stop you from saving for a down payment if you are hoping to buy a home soon.

Poor credit-

Low credit scores are plaguing many millennials. The average credit score for this generation is 640, which is lower than both gen x and baby boomers as well as the median credit score for obtaining a mortgage loan. Whether those low scores are from lack of credit, high credit card debt, missing payments, or any other reason, there are plenty of ways to bring that score up.  

Consider These Factors before Buying Your First House